The Case for the Public Option (in Banking)

The federal government's response to the financial crisis has been to bailout and stabilize the largest banks and financial institutions, with too  little assistance for everyone else, in hopes of restoring private lending to pre-crisis levels. This is reminiscent of the trickle-down approach of the Hoover administration at the start of the Great Depression, and as in the 1930s, this policy has failed to achieve a strong and sustainable recovery. Our Next Social Contract Initiative recently released a paper by Timothy Canova* of Chapman University School of Law which discusses how the creation of public banking institutions, along with the leveraging of the Troubled Asset Relief Program (TARP), can fill the unmet need for credit that resulted from the failures of private banking. This idea is being implemented currently in the Great State of North Dakota. The Bank of North Dakota has operated continuously, at a profit, and according to conservative banking principles since 1919. It is a model for other states in a number of respects. Canova notes:

The state deposits its tax revenues in the Bank which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the state treasury – more than $300 million in the past decade. Thanks in part to these institutional arrangements, North Dakota is the only state that has been in continuous budget surplus since before the financial crisis and it has the lowest unemployment rate in the country.

Other states should look into this model and even Congress should take a close look at some of the upsides of establishing a public bank at the federal level, such as being able to finance costly but productive infrastructure projects.

*An earlier version of this post identified a fictitious co-author. In reality, Tim Canova wrote this paper alone but he is the Betty Hutton Williams Professor of International Economic Law at the Chapman University School of Law.